Market Drivers Aug 4, 2015

RBA keeps rates oh hold changes languages on currency rates
UK PMI Construction eases as residential build slows
Nikkei -.14% Europe -.21%
Oil $45/bbl
Gold $1089/oz.

Europe and Asia:
AU Retail Sales 0.7% vs. 0.5%
AU Trade Balance -2.9B vs. -3B
RBA Keeps rates at 2.0%
UK Construction PMI 57.1 vs. 58.6

North America:
USD Factory Orders 10:00

The Aussie soared in late Asian and early European trade today rising more than 120 points off the session lows as better than expected economic data and decidedly less dovish statement from the RBA helped fuel a rally that sent shorts scrambling for cover.

Australian Retail Sales printed at 0.7% versus 0.5% eyed while the Trade Balance gap was slightly better at -2.9B vs. -3.0B eyed. The strong consumer spending may have been driven by seasonal factors such as back to school sales, but was nevertheless a welcome sign that the economy remains in decent shape despite sharp cutbacks in mining sector.

However, it was the RBA statement that truly sparked some fireworks in late Asian session trade as Aussie quickly gained 100 points in its wake. The RBA left rates unchanged as expected at 2.00% but the key change in its wording pertained to the Aussie itself. Rather than repeating the phrase “Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices,” the RBA instead noted that “The Australian dollar is adjusting to the significant declines in key commodity prices.”

The shift in posture to a much less aggressive stance vis a vis currency devaluation convinced the market that the RBA may consider current levels to be fair value for the currency right now. The central bank has to walk fine line between keeping Aussie low enough to make exports competitive while maintaining its value high enough to avoid making imports a massive burden for the consumer.

One possible key factor in its change of stance may have been the soaring costs of petrol. Despite crude being at $45/bbl Australian gasoline prices are actually up 6% since the start of the year and the RBA may have been eager to temper the rising burden to the motorists.

In either case, it’s clear that the RBA will remain neutral for the time being keeping rates at 2.0% unless conditions deteriorate markedly. The market will get its next glimpse at data on Thursday when the Aussie unemployment figures are released. The market is looking for 12.5K jump from 7.3K the month prior and unless numbers show a decline the market is likely to keep the Aussie bid. The pair has been so grossly oversold that a rally to .7500 is likely as shorts continue to cover over the next few days.

Elsewhere the markets were quiet with euro, yen and cable all contained within narrow 50 point ranges amidst very little fresh news. UK PMI construction slipped a bit to 57.1 but remained well above the 50 boom/bust line having little impact on cable. The market will focus tomorrow on the UK PMI Services report which is expected to decline slightly to 58.1.

In North America the calendar is barren save for Factory Orders with all the key data starting to be release tomorrow. That could provide another day of relatively sedate trade until volatility picks considerably into the end of the week as we approach the US NFP data.

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